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Hillary Clinton once again called for a 90 day moratorium for mortgage foreclosures on owner occupied homes and a 5 year freeze on interest rates on sub-prime mortgages at the star studded political event at the Kodak Theatre in Los Angeles. The idea does not receive the same applause on Wall Street as it did on Hollywood Boulevard last night. Speaking from the floor of NASDAQ last December Hillary called on the investment community to find an alternative to their legal redress being careful to note this wasn’t a quick fix for the industry:

“I’m here today to call on Wall Street to do its part to help end the foreclosure crisis that is devastating middle class families and threatening our economy… What I’m proposing is a comprehensive work-out, not a bailout.”

The days when borrowers went to their local bank to obtain mortgage money are long gone. The secondary mortgage market, where local lenders issue mortgages to be packaged with other loans and sold in blocks to investors has enabled more Americans to own their own homes than ever dreamed of before. This has expanded the availability of mortgage funds geographically outside the nations financial centers. Lenders big and small can sell the loan in the market and go out and lend it again retaining a fee for their services.

Yields on loans, just like any investment, are determined by risk. Even the rates on these sub-prime mortgages are much lower than those of unsecured loans such as consumer debt because they are secured; the lender can recover their investment, or in a declining market such as we are currently experiencing, a major portion of it. The procedures for recovery are stipulated by state laws the investors consider in advance. If their redress is denied, as Hillary is proposing, who is going to put up the money for new loans for the housing market to recover? You are! And it will be done through the Federal National Mortgage Association, aka “Fannie Mae.”

Fannie Mae was a product of the “New Deal” and spun off as a quasi-public entity in 1968. It created a secondary mortgage market along with a limited guarantee for loans made according to their underwriting guidelines. It enjoys certain regulatory exemptions private sector entities don’t including disclosure and regulatory review. Among other advantages is the fact the U.S. Treasury is authorized to purchase $2.5 billion of Fannie Mae mortgage securities to preserve it’s liquidity. It won’t take much in a Democratically controlled Congress to change a few parameters and not only bailout some sub-prime lenders but a scandalous cash gushing Fannie Mae as well.

Former political consultant to the Clinton’s, Dick Morris, claims that “Fannie Mae is to the Democrats what Enron was to the Republicans..” In a chapter on Fannie Mae in his book Outrage, he says

“… the unintended consequence of Fannie Mae’s quasi-public status has been to build an empire of the Left–a self-perpetuating private company that uses public benefits to maintain a large patronage and funtion that sustains liberal causes throughout the nation.”

“The green Elysian fields of Fannie Mae offer top bonuses to key Democrats. This was all well and good, until federal regulators discovered a nasty secret: Fannie Mae had been cooking the books–overstating its profits by $9 billion, which jacked up the bonuses its favored Democrats were entitled to receive.”

Franklin Delano Raines, director of the Office of Management and Budget [OMB] during Bill Clinton’s administration, was one such benefactor. Over a six year period he received and estimated $90 million as CEO of Fannie Mae. These amounts pale in comparison to the overall costs to tax payers caused by an organization exempt from reporting changes in financial condition according to a quote from from the Congressional Budget Office in Morris’ book:

“The subsidy to Fannie Mae and Freddie Mac is worth about $11 billion a year.”

While Hillary is want to scold Wall Street for it’s “greed,” keep in mind that it is Fannie Mae that services about 40% of the home mortgages in the United States. Assuming she does become President, this is where the blame will be placed while a list of former officials in patronage positions in Fannie Mae escape prosecution keeping their corrupt receipts while a multitude of mindless celebrities nod with glowing approval of her good deeds.

This entry was posted on Friday, February 1st, 2008 at 3:05 pm and is filed under Economy, Election, Politics. You can follow any responses to this entry through the RSS 2.0 feed.